Fine print spells trouble for exporters

EXIM MATTERS

The Budget speech of P Chidambaram drew all-round praise but the fine print in the Finance Bill has upset many businesses and even economists.

The post-Budget analyses have focused primarily on the fringe benefit tax and the cash transaction tax. Other issues have receded to the background.

The fact, however, is that there are many other points worth taking note of. The government has now made it clear that import of services will be taxed but export of services will not be taxed. Clause 88 in the Finance Bill 2005 adds an explanation to Section 64 of the Finance Act, 1994 (the basic service tax legislation).

The essence of the explanation is that if any resident receives any taxable service rendered abroad, he will have to pay service tax. This means that exporters will have to pay service tax on agency commission, warehousing abroad, distribution services and even on transportation or any other charges that they remit to foreign parties.

This can boost the transaction costs for the exporters. Bigger manufacturer exporters can take Cenvat credit of the service tax that they pay but smaller exporters or merchant exporters will have to absorb the costs.

The government notified the new Rules for Export of Services on March 3. According to these, different criteria apply to different categories of services. Three conditions have been notified for determination of 'export of services'.

Taxable service can be exported on payment of service tax or before. The government will rebate service tax paid on the services exported as well as the tax paid on the input service and central excise duty paid on the inputs used in the exported service. The notifications that exempted service tax against all payments in foreign exchange received towards export of services have been rescinded.

However, exporters of services have time until March 15 to get their inward remittance in respect of services exported and take the exemption.

The finance minister in his Budget speech had made a significant statement: new duty drawback rates will be announced by the end of April. The Drawback Department used to wait till June 1 to announce revised rates, but last year, the practise was changed and the revised rates were announced on April 1.

The reason for the postponement seems to be that the finance ministry and the commerce ministry have not yet resolved their differences on how to replace the Duty Entitlement Passbook (DEPB) scheme with a vastly expanded duty drawback scheme.

So, it appears that the DEPB scheme will continue at least beyond April 1. Exporters are rushing to maximise the shipments in March so that they can avail of the DEPB benefits. They should continue to push as many shipments as possible in April too to get higher duty drawback based on the pre-Budget import duty rates.

The sunset clause that denies income tax exemptions for units set up in Special Economic Zones (SEZ) has angered the commerce ministry. The SEZ scheme, however, has been a remarkable failure as there is no significant functional SEZ, except the Export Processing Zones that were renamed SEZ.

tncr@sify.com